q4 2007 bear stearns earnings conference call on dec. 20 ...€¦ · 20/12/2007 · 6% of bear...

F I N A L T R A N S C R I P T

BSC - Q4 2007 Bear Stearns Earnings Conference Call

Event Date/Time: Dec. 20. 2007 / 10:00AM ET

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C O R P O R A T E P A R T I C I P A N T S

Elizabeth VenturaBear Stearns - Head IR and Corporate Communications

Sam MolinaroBear Stearns - CFO, COO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Roger FreemanLehman Brothers - Analyst

Guy MoszkowskiMerrill Lynch - Analyst

James MitchellBuckingham Research - Analyst

Michael HechtBanc of America - Analyst

Douglas SipkinWachovia - Analyst

Meredith WhitneyCIBC World Markets - Analyst

Mike MayoDeutsche Bank - Analyst

Jeff HarteSandler O'Neill - Analyst

Glenn SchorrUBS - Analyst

P R E S E N T A T I O N

Operator

Good morning, ladies and gentlemen. Welcome to the Bear Stearns 2007 fourth quarter earnings conference call. All participantshave been placed on a listen only mode. At the end of the prepared remarks, the call will be opened up for a question andanswer period. (OPERATOR INSTRUCTIONS).

I will now turn the conference over to Elizabeth Ventura, Head of Investor Relations and Corporate Communications. Ms. Ventura,please go ahead.

Elizabeth Ventura - Bear Stearns - Head IR and Corporate Communications

Thank you, Dennis. Good morning, everybody. Happy holidays. Welcome to our fourth quarter and full year 2007 resultsconference call.

Before we begin the discussion of results, I'd like to take a moment to remind you that contained in this discussion areforward-looking statements. These statements reflect the firm's belief at this time and are subject to risks and uncertainties.Sorry, these are risks and uncertainties that could affect our business and potentially change our future performance. Some

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Dec. 20. 2007 / 10:00AM, BSC - Q4 2007 Bear Stearns Earnings Conference Call


examples include changes in interest rates, market conditions, and the current backlog of pending transactions. In addition ourbusiness can be greatly affected by shifts in domestic or global market and economic conditions.

For a fuller discussion of these risks, please see our disclosures filed with the SEC and our most recent annual report in ourquarterly 10-Q filings. In particular, read the sections Management's Discussion and Analysis of Financial Condition and Resultsof Operations and Risk Management. You can see these documents through our website, and this audiocast is being recordedand is the copyrighted material of Bear Stearns Companies, Inc. and may not be duplicated, reproduced or rebroadcast withoutour consent. Thank you, and I'd now like to turn the call over to our Chief Financial Officer and Chief Operating Officer, Mr. SamMolinaro.

Sam Molinaro - Bear Stearns - CFO, COO

Thanks, Elizabeth and good morning, everybody and welcome again to the Bear Stearns Company's quarterly earnings conferencecall for our fourth quarter ended November 30. Market conditions during the company's fourth quarter continue to be verychallenging, as the global credit crisis that began in July continued to adversely impact global fixed income markets. Thecombination of continued weakness in the U.S. housing market and increased mortgage delinquencies together with investoranxiety over recessionary pressures, rating agency downgrades of various structured products and uncertainties with respectto assets lead to significant declines in MBS prices and activity.

On November 14, we announced we would take a $1.2 billion writedown on our mortgage securities inventories as a result ofcontinuing deterioration and market conditions through the end of October. During the month of November, market conditionscontinued to deteriorate, which resulted additional writedowns, bringing total mortgage related losses to $1.9 billion orapproximately $8.21 per share. This writedown, together with difficult conditions across the credit and interest rate marketsresulted in net revenues turning negative to a loss of $379 million for the quarter, and the Company recording its first everquarterly loss of $6.90.

The extremely disappointing results we experienced this quarter are attributable to a number of factors. In fixed income, inaddition to the significant decline in mortgage markets, high grade and high yield credit spreads increased significantly, movingto the widest levels that we have seen in several years. As a result, market conditions were exceptionally challenging and weexperienced significant declines in credit trading results. The deteriorating conditions in the global fixed income markets alsoresulted in customer trading volume declining significantly, customers moving to more risk averse assets and strategies.

Equity market conditions were mixed during the quarter. Concern over the impact with the difficulties in the U.S. housing marketon a broader U.S. economy and continued tight global credit conditions caused significant volatility in equity markets. Whilecustomer volumes rose significantly both in the U.S. and Europe, the more volatile market conditions resulted in significantlyweaker trading revenues, and structured equity products when compared to the record performance.

Investment Banking activity levels also declined as a result of these conditions. M & A volumes declined as the more difficultcredit market conditions and leverage finance and high yield served to significantly reduce financial sponsor activity. Equityunderwriting activities also declined, reflecting a more difficult environment. The $6.90 loss per share recognized for thecompany's fourth quarter of fiscal 2007 compares to net income of $4 in the November 2006 quarter. Sequentially, fourth quarterearnings declined from $1.16 per share, earned in the third quarter of fiscal 2007.

Diluted earnings per share of $1.52 for the full fiscal year ended November 30, 2007, represented a decrease of 89% from the$14.27 per share earned in fiscal 2006. Included in the company's second quarter results was a charge of $227 million, or $0.88per share related to the write-off of intangible assets representing goodwill and specialist rights associated with our New YorkStock Exchange specialist activities. Earnings per share for Fiscal 2007 excluding this charge were $2.41 per share, a decreaseof 83% when compared to 2006. Also included in fiscal 2007 results are approximately $2.6 billion of net inventory writedowns






related to market losses in mortgages and leverage finance recognized in the third and fourth quarters. These losses, representingapproximately $10.11 per share, served to materially offset strong results delivered by the balance of the franchise.

In particular, we experienced record years in a number of key areas such as institutional equities, global clearing, and privateclient services, reflecting successes we've achieved in executing against our strategic objectives. Revenues from our internationalactivities also were adversely impacted by the challenging global fixed income and equity market conditions. Inventorymarkdowns of mortgage and asset backed security positions held in both Europe and Asia served to reduce international netrevenues significantly to approximately $84 million, a decline of 84% from the record $536 million earned in the August quarter.However, despite these results, international revenues reached a record $1.6 billion for fiscal 2007, a 23% increase from $1.3billion earned in fiscal 2006.

International expansion remains a key priority as we move into 2008. In fact, our international headcount increased to over2,100 people, a 37% increase from 1,500 people a year ago. During the quarter, we also announced an agreement in principleto establish a comprehensive strategic alliance with Citic Securities. The alliance will include the establishment of a joint venturein Hong Kong, together with the cooperation agreement to assist Citic in the development of their institutional capital marketsactivities in China.

We also announced we would issue a $1 billion 40 year convertible trust preferred securities that would convert to approximately6% of Bear Stearns, and that we would acquire a six year convertible bond and warrants, giving us the right to acquire 7% ofCitic. We expect the transaction to close during the first half of 2008. We are confident that the combination of our operationsin Asia with Citic Securities will greatly benefit our global client base and generate significant opportunities for revenue growthin the years ahead. During the quarter, we took actions to reduce our overall operating cost by reducing headcount andrationalizing our businesses in light of the deteriorating market conditions. Total employee headcount was reduced byapproximately 1400 employees or 9%, as we reduced staffing levels across the firm and in particular, in the mortgage originationand securitization areas. The headcount reduction resulted in non-recurring severance cost of approximately $100 million beingrecognized during the fourth quarter. We will continue to monitor market condition and make additional cost reduction asnecessary during 2008.

Our performance this quarter, and for the full year, is clearly disappointing, not acceptable to us. We are fully committed andconfident in our ability to return the franchise to profitability in 2008. To that end, we have taken a number of important stepsto reduce risks, maintain a high level of balance sheet liquidity and cut operating costs. The headcount reductions we madeover the course of the fourth quarter will reduce operating costs in excess of $250 million, and should meaningfully enhancepre-tax margins in 2008. We remain committed to our core strategy of expanding our global equity and clearing franchises,increasing the diversification of our fixed income activities by product and region and continuing the development of ourinternational activities.

Another area of focus is our unwavering committment to the philosophy of pay for performance. At the executive committeelevel, this means that if the Company doesn't make money, executive committee bonuses are zero. Our plans to design withthis goal in mind and as a result executive committee members will not receive any compensation for fiscal 2007. This philosophyis at the core, is at our core, and represents our culture of meritocracy and performance.

If I could ask you now to please turn your attention to our segment data contained in the earnings release i'll review each ofthe three major business segments, capital markets, global clearing services and wealth management. Capital Market netrevenues which includes institutional equities, fixed income and investment banking were a loss of $956 million for the quarter,a decrease from $1.91 billion of net revenues in the November 2006 quarter and a decline from a gain of $1.05 billion earnedin the August 2007 quarter. Institutional equity net revenues decreased 11% to $384 million when compared to $430 millionearned in the November 2006 quarter. Sequentially, institutional equity net revenues decreased 47% from a record $719 millionearned in the August 2007 quarter.






During the quarter, the domestic and international cash equity sales areas achieved record results associated with increasedcustomer volumes and market share gains. Risk arbitrage revenues rebounded strongly from the difficult sequential quarterdue to more favorable market conditions. The principal strategies area also experienced record net revenues, an increasedtrading gains and quantitative strategies. The strong fourth quarter performance for each of these areas capped off record yearsin each area. Offsetting these increases were significantly reduced net revenues from the structured equity products area,primarily due to volatile market conditions and a $190 million reduction in gains on our structured note portfolio when comparedto the prior quarter.

Fixed income net revenue for the fourth quarter was a loss of $1.54 billion, down meaningfully it from a gain of $1.1 billionearned in the November 2006 quarter. Sequentially, fixed income revenues also decreased when compared to the gain of $118million earned in the August 2007 quarter. The quarter's results include net inventory markdowns of $1.9 billion, which includedthe $1.2 billion loss previously disclosed on November 14th. During the quarter, the Company had gross inventory markdownsof mortgage assets of approximately $3.2 billion. Partially offsetting these losses were hedging gains of approximately $1.3billion.

A large component of these losses were approximately $1 billion of losses incurred related to CDOs and the unwinding of CDOwarehouse facilities where customer loss mitigation arrangements proved to be inadequate. At November 30th, all CDOwarehouse positions have been unwound and collateral has been sold or hedged. Remaining net losses were experiencedacross our U.S. and international CDO Alt-A and subprime mortgage loans and securities and commercial loan inventories,reflecting weakness in global market conditions. At the end of November 2007, the Company had approximately $46 billion ofmortgage and asset backed loans and securities.

Included in the exposure are subprime mortgage loans of $500 million, representing 2007 vintage production and $1.1 billionof investment grade subprime securities and $200 million of below investment grade securities. KBS CDO exposures areapproximately $750 million at the end of the quarter. Currently, our mortgage and asset backed inventories are approximately$43.6 billion, down 5% from quarter end. I should point out these balances represent gross asset values and net exposures areconsiderably lower. And in particular, net of hedges, our ABS CDO and subprime positions are net short.

At year-end, the Company held $7.8 billion of retained interest in our own MBS securitizations, a 19% decline from the $9.6billion level at August 31. The non-investment grade portion of retained interest is $1.3 billion, down slightly from the August31 levels. The valuation of our mortgage positions reflects a combination of observable market data, the decline in the ABXindexes and our expectations of housing prices, defaults and cumulative losses. Accordingly, while no assurances can be givenas to future performance, we believe our mortgage positions have been conservatively valued in light of current marketconditions and expected levels of defaults and cumulative loss estimates.

Difficult global credit market conditions also served to create challenging trading environments in both rates and credit productareas as credit curves inverted, and spreads widened and correlation estimates improved elusive. Credit product net revenuesdeclined sharply during the quarter, reflecting a more challenging environment and net losses were experienced in our flowand structured credit areas. In our rates area, increased customer activity was offset by more challenging markets for interestrates and foreign exchange options.

Partially offsetting the losses from our credit trading businesses were improvement in our leverage finance area which reboundedfrom the poor results during the sequential quarter. Leverage finance pipeline commitments declined significantly during thequarter, to $600 million from $7.6 billion at August 31, 2007, and closed and funded loans outstanding decreased to $2 billionfrom $2.5 billion. Investment Banking revenues for the company's fourth quarter, excluding merchant banking revenues were$205 million, a 38% decrease when compared to $329 million of the November 2006 quarter and a 15% decrease when comparedto $241 million earned in the August 2007 quarter.

Underwriting revenues for the fourth quarter were $113 million, a decrease of 32% from $165 million earned in the November2006 quarter. This decline primarily reflects lower high yield underwriting revenues resulting from a more difficult fixed income






Capital Markets environment. Equity underwriting revenues also decreased when compared to the November 2006 quarter onlower volumes of equity follow-on and convertible new issue activity. Sequentially underwriting revenues increased 13% from$100 million earned in the August 2007 quarter.

M & A and advisory revenues were $150 million for the fourth quarter, a 7% increase when compared to $140 million in November2006 quarter. Sequentially, M & A revenues increased 2% when compared to the $148 million earned in the August 2007 quarter.The difficult market environment for leveraged finance that began in the third quarter has continued through the end of ourfiscal year. As a result, leverage buyout activities have declined and equity market volatility has reduced the backlog of equityofferings. However, M & A discussions with corporate clients remains active and our backlog of M & A and underwritingassignments at the end of the quarter has increased slightly from the levels achieved at the end of the August quarter. Accordingly,despite the difficult market conditions for leverage finance, related activities, strategic M & A dialogues have increased andequity backlogs have remained relatively firm.

Included in the investment banking net revenues are revenues generated from our merchant banking activities. For the currentquarter, merchant banking revenues were flat compared to a gain of $35 million in November 2006 quarter and a loss of $29million in the August 2007 quarter. Global clearing services net revenues increased by 2% to $276 million when compared to$271 million in the November 2006 quarter. Net interest revenues increased 1% to $205 million from $203 million in last year'squarter and this average margin debt balance has increased from the levels reached in November 2006 quarter. Clearancecommission and other revenues increased 3% to $70 million from $68 million in the year ago quarter, due to increased customeractivity. Sequentially, global clearing services revenues decreased 17% when compared to the record revenues of $332 millionearned in the August 2007 quarter.

Net interest revenues decreased 21% from a record $259 million in the third quarter, and this average margin debt, customershort balances decreased. Clearance commission and other revenues decreased 4% from $73 million in the August quarter,due to reduced customer activity. During the fourth quarter, average customer margin balances increased 14% to $82 billionfrom $72 billion in the November 2006 period, and down 20% from a record $102 billion in the August 2007 period. Averagecustomer short balances were $85 billion, down 6% from $90 billion in the November 2006 period and down 17% from therecord $102 billion in the August period. Average securities borrow balances were $61 billion, up 6% from $58 billion in theNovember 2006 period, and down 12% from $70 billion in the August quarter.

The decline in average customer margin debt and short balances, when compared to the August quarterly levels, reflects clientdeleveraging due to the challenging market environment as well as prime broker balance reallocations experienced duringearly August. Customer balances have increased off their lows experienced in the third quarter and new business prospectsremain strong. Equity and client accounts in November 30, 2007, increased 2% to $289 billion, when compared to the August2007 quarter. Quarter end customer margin balances were $86 billion, customer short balances were $88 billion, and securityborrowed balances were $63 billion. For the full fiscal year, global clearing achieved record revenues of $1.2 billion, up 11.5%from fiscal 2006, reflecting significant customer balance growth and prime brokerage. We believe the success of the franchisein 2007 provides clear evidence for the value of merging our cash, derivative and clearing franchises and positions us forcontinued success in 2008.

Wealth Management net revenues for the quarter increased 10% to $272 million when compared to $247 million in the November2006 quarter. Product client services net revenue rose 20% to a record $161 million from $134 million earned in the year agoquarter, primarily reflecting growth and fee based revenues in commissions. [Each based] assets and BCS customer accountsreached 9% to $11.1 billion at the end of the fourth quarter when compared to $10.2 billion in the year ago period. AssetManagement revenues for the quarter were $111 million, slightly down from $113 million earned in the November 2006 quarter.The strong results were primarily due to growth and Management fees on alternative assets and traditional fixed income assets,and in addition, performance fees increased on growth and fees and proprietary hedge fund products.

Sequentially, Wealth Management revenues increased from a loss of $38 million when compared to the August 2007 quarteras the business rebounded from the third quarter, which included $170 million loss in the Asset Management area. Full year






Asset Management revenues were $228 million, down 32% from fiscal 2006; however, excluding the impact of the losses incurredfrom the failure of the high grade hedge funds, net revenues are up 14% to $382 million, reflecting strong growth in bothManagement and performance fees. Full year net revenues in the private client services area were also a record $602 millionup 15% from fiscal 2006.

Level assets under management at November 30, 2007, were $44.6 billion, a decrease of 15% when compared to $52.5 billionat November 30, 2006. Sequentially, assets under management were down 23% from the levels at August 2007. The decline inassets under management primarily relates to the $8.8 billion transfer of assets related to the spin-out of O'Shaughnessy AssetManagement. Under the terms of our agreement, BCM will maintain a continuing interest in the results of O'Shaughnessy andwill maintain a sub advisory arrangement of $5.3 billion of AUM. Alternative assets under Management were $8.3 billion atNovember 30, down 7% from $8.9 billion at August 31, but up 6% from $7.8 billion at November 2006.

Moving to expenses, total expenses were $992 million, down 35% from the year ago quarter and down 14% from August 2007quarter. The decline in total expenses is primarily due to lower employee compensation and benefit expenses, which decreasedboth sequentially and year-over-year due to lower net revenues. Employee compensation and benefits for the fourth quarterwere $326 million, a decrease of 69% from $1.05 billion in the fourth quarter of 2006. Sequentially, employee compensationand benefits decreased 51% from $664 million in the August 2007 quarter. Compensation of net revenues for the year-endedNovember 2007 was 57.6% as compared to 47.1% in fiscal 2006.

The increase in compensation ratios when compared to fiscal 2006 reflects the impact of the significant decline in net revenuesexperienced during 2007 associated with losses recognized in mortgage and asset backed products. The compensation ratioincreased as other areas of the Company performed well and compensation levels needed to be maintained in order to reflectmarket levels. During the year, the Company amended the terms of its stock awards for fiscal 2007 in order to align its planswith market practices and to emphasize long term service and retention objectives. The 2007 stock awards established futureservice requirements to be met in all cases in order to satisfy vesting requirements. Accordingly, the awards granted in December2007 will be expensed over the vesting period or sooner for a participant that is retirement eligible. The net effect of the changeand the terms of the stock award was approximately $720 million of 2007 stock awards will be deferred and amortized over theapplicable vesting period.

Worldwide headcount as of November 30, 2007, was 14,100, up from 13,600 on November 30, 2006, but down from the 15,500level reached in the sequential quarter. The overall headcount increase we've experienced as compared to November 30, 2006,reflects the expansion of our fixed income, wealth management, global clearing and derivatives areas, which are attributableto increased business activities and growth initiatives, particularly internationally. However, during the fourth quarter, headcountwas reduced by action and attrition of approximately 9% or 1,400 employees, reflecting the difficult global credit markets.Non-compensation expenses were $666 million for the quarter, an increase of 42% when compared to $468 million in November2006 quarter.

The increase in non-compensation related costs when compared to the November 2006 quarter is primarily related to increasedseverance expenses, legal settlements and professional fees. These increases were partially offset by lower cap plan-relatedexpenses. Also adding to the increase in non-compensation expenses are higher transaction-related costs associated withhigher business volumes, as well as higher occupancy, communication and technology costs, associated with the increase inworldwide employee headcount. Sequentially, non-compensation expenses increased 35% when compared to $492 million inthe August 2007 quarter, associated with severance costs, increased legal related expenses and minority interest costs. Capplan related expenses were a credit of $59 million during the quarter, versus $46 million of expense in the November 2006quarter, attributable to the decreased level of earnings. Sequentially, cap plan related expenses were $4 million in the August2007 quarter.

Our tax rate for the quarter was a benefit of 38%, reflecting a net loss before income taxes and relatively fixed level of taxpreference items. Our year-to-date tax rate also moved to a net tax benefit of 21% as compared to a tax rate of 34.7% for thefull fiscal year 2006, reflecting the mix of domestic and international profits. Book value at November 30, 2007, was $84.09 per






share with 136.2 million shares outstanding. Book value declined from August 31, 2007, primarily reflecting the impact of thenet loss in the fourth quarter in treasury stock purchases. During the quarter, we repurchased 3.4 million shares of commonstock at an aggregate cost of $373 million. For the full fiscal year, the company repurchased 12 million shares of common stockat an aggregate cost of $1.7 billion.

At November 30, 2007, approximately 7% of the firm's assets were considered Level 3 assets. Given a lack of liquidity in themarketplace for many instruments, it's reasonable that some assets which used to be Level 2 assets would move to Level 3.While we haven't completed the review for the 10-K disclosure , it is anticipated that the amount of Level 3 assets will increaseby approximately $7 billion when compared to the August 31 amounts. Firm-wide VAR at the end of the quarter increasedsignificantly to $69 million when measured against the August 31, 2007 amount. While the Company reduced positions andrisks during the quarter, the increase in VAR is primarily the result of significant increase in market volatility during the quarterand the impact of the Williams transaction, which closed during the period. With respect to our balance sheet, capital andliquidity position, our profile is strong, as of November 30, 2007, total stockholders equity was $11.8 billion and total capitalwas $80.3 billion. During the quarter, we moved to enhance our liquidity position by reducing the risk on our balance sheet,continuing to reduce commercial paper out standings and increasing secure term funding and maintaining our strong cashliquidity pool.

Our approach to liquidity risk management insures that we are able to meet all of our unsecured debt maturities over the next12 months without issuing additional unsecured debtor liquidating assets. Over the past several quarters we have materiallyreduced reliance on short-term unsecured funding while simultaneously building excess liquidity at the parent Company.Commercial paper outstanding currently stands at $3.9 billion, compared to $4.6 billion, and $20.7 billion at August 31, 2007,and November 30, 2006 respectively. The firm's parent company liquidity pool, which consists of very high quality money-marketinstruments, stands at $17.4 billion. In addition, readily available secure non-secured committed bank lines are approximately$8 billion.

In closing, let me make a few remarks about our outlook as we head into 2008. While 2007 was an incredibly challenging year,we begin 2008 as a stronger firm. Our international expansion efforts are on track, the buildout of our European effort continuesto go well, and in Asia, we're excited about our partnership with Citic Securities. In equities, we achieved record levels in 2007.Our energy business has reached new level with the closing of the Williams transaction, by broadening our national presenceas a major player in the physical energy markets. We think there is significantly more to come in the development of thatbusiness. Our clients tell us they're extremely pleased with the comprehensive service they're receiving because of the successfulintegration of our cash and derivatives equities and prime brokerage efforts both in the U.S. And internationally, and we believethere are more benefits to be realized in this area.

In Wealth Management our record performance in PCS tells us our strategy of hiring experienced brokers with proven booksof business is the right one for us and the changes in our strategy for BCM are showing early signs of success. While fixed incomeconditions are likely to remain challenging for some time, we are moving to reposition our industry leading mortgage area toreflect the current market environment. In recent weeks, we've completed steps to size our mortgage origination business tomore accurately reflect our view of current and potential market conditions. As part of this effort, we closed our subprimeoriginator Encore Credit, reducing occupancy costs, headcount and technology spend, while retaining our ability to originateall types of mortgages through Bear Residential Mortgage Corp. In the distressed mortgage area, we've devoted significantresources to developing EMC servicing platform including expanding our capabilities and loan modification and work outthrough EMC's Mod Squad.

In addition, we continue to believe there will be opportunities in the future to purchase and service distressed loan portfolios.Overall this franchise is strong, smaller and more focused on restructuring than origination going forward, and but our toptalent is in place and we're confident in the underlying earnings potential of the mortgage business. As a Management team,we're determined to improve our performance, the employees here are motivated and we're very confident in the earningspower of the franchise. Okay with that, I'll open the call up for






Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS). The first question comes from Roger Freeman from Lehman Brothers. Please ask your question.

Roger Freeman - Lehman Brothers - Analyst

Oh, hi. Thank you. I guess, Sam, could you comment a bit on the contour of customer activity levels during the quarter, particularlycompare sort of November to September and October and maybe give us an early read on what you're seeing in Decemberhere?


Well, I would say as we came into the quarter, conditions seemed to be relatively improving and certainly didn't end that way.I would say as we progressed through October and November, market conditions got significantly more difficult and as a result,we saw customer activity in fixed income declining relatively significantly and moving to more safe havens if you will so theactivity we saw in fixed income during the fourth quarter were, I'm sorry, we're having a little problem, with this, can you hearme okay?


Barely, but yes.


Yeah, sorry, we're having a little problem, but at any rate, the activity levels as I said were more subdued and most the fixedincome markets, certainly in credit and mortgages during the latter end of the quarter and the more liquid products and ratesand foreign currency, obviously customer volumes continue to be strong. As we move into the first quarter, conditions haveseemingly been improving. The effect of the Paulson plan, moves of central banks around the world to improve liquidity, allhave had a favorable impact and activity levels have picked up and conditions have been somewhat better than where weended in November.


Okay, the actions you have taken to resize the business, how far, have you taken the actions you think you need to take at thispoint pending additional slowdown or is there still more to come in the first quarter?


I think we've taken the actions that we need to take right now. As I said, we'll continue to monitor the environment and to theextent things change or become more difficult, we'll take additional actions if necessary, but the key focus that we've had hasbeen to get our operating costs down, clearly we needed to address the mortgage origination effort which had been built upin a different environment, and in light of expected volumes, that needed to be addressed so we've done that.







Okay, can you, there were actually losses this quarter from marking structured debt on your balance sheet to market, eventhough your CDS spread widened, and last quarter you talked about trying to lock in those gains. Was the reversal have anythingto do with hedging activities you took there?


No it was really that the gains were smaller. The gains were larger in the third quarter than they were in the fourth quarter.


Oh, so it was just a reduction in the amount of gains is what you were saying?


That's correct.


Got it. Okay, and just on the structured equities, how much of the decline in the equities business during the quarter was relatedto slowdown in that piece and is that just a function of clients sort of sitting back in this volatile market, not doing transactions?


Well most of the decline in the equity revenues came from the decline of structured equity revenues. Now we had a recordquarter in the third quarter. Fourth quarter, customer volumes were not bad but the market was extremely volatile and we hadlower performance from our SEP area as a result.


Okay, lastly, how much of the markdowns in fixed income were related to CMBS and Alt A during the quarter?


Well, of the $1.9 billion in writedowns, as I said about $1 billion of that came from the writedown of CDOs and the unwindingof the CDO warehouse. The balance of those losses, $900 million came from revaluation of our mortgage books, both our AltA positions as well as commercials.


Was one much bigger than the other there in terms of Alt A or commercial?


The Alt A and other mortgages were larger than the commercial.







Okay, all right, thanks a lot.


Sure.

Operator

The next question comes from Guy Moszkowski from Merrill Lynch. Please ask your question.

Guy Moszkowski - Merrill Lynch - Analyst

Thank you, good morning, Sam.


Good morning Guy.


I know you went over this quickly but I was wondering if you could help us reconcile the risk exposures to the chart that youshowed us on November 14th that was broken up sort of AAA, super senior and then U.S. subprime mortgage exposures. Atthat time, the net of the two was roughly $830 million and I'm just wondering if there's an update to that which would reconcilesort of to the $700 million greater charge that you took?


Yes, I have that Guy. I have to, in my stack of stuff here, I have to try to find that, but I think that just from memory, while I try tofind the right schedule to walk you through this, we saw, we came into this quarter with a subprime position that I think wasflattish and we closed the quarter with a net short subprime position. We came in to the quarter with a CDO position that I thinkwas about $850 million and we closed at about what was the number I just gave you, $700 million? I believe that was thenumber.


Okay, so it sounds like then most of the difference between the hit that you pre-announced on November 14th and the actual$1.9 billion that you did was really away from the CDO and subprime and more just a result of taking a big writedown to Alt Aand CMBS; is that fair?


Partially, yes. We had some additional losses in warehouse facilities that we had in Europe and Asia that were not included inthat $1.2 billion. That was part of it and additional markdowns on CMBS positions and then of course the continued decline inthe indices and decline in the market for residential mortgages.







Yes, okay. Including Alt A, Which you really didn't address November 14th?


Well we did address Alt A. Alt A was included in that markdown and market conditions continue to deteriorate. We took additionalmarkdowns.


Got you, okay. That helps me understand sort of the difference, thank you.


Okay.


And just to clarify, on the reduction in equity revenues because of the structured product declines, is most of that decline instructured product revenue that you addressed the result of the decline in the credit that you get from the structured productrelated liabilities that we talked about or is it that the actual underlying flow of that business declined?


I would say it was about 50/50 between lower trading revenues in a very difficult trading environment and structured equitiesgiven the level of market volatility and the decline in the structured note gains.


Okay, that's also helpful, thanks.


Okay.


Let me ask you a question about capital. There's not a lot in your release on the balance sheet. Maybe you could talk to us aboutyour capital position at quarter end, not just in absolute terms but in terms of key capital ratios, how they look at the end of thequarter given the reduction in book value and sort of how that looks when you then layer in the capital infusion that's comingfrom Citic and whether we should think that given the magnitude of the charges, you might be capital constrained or whetherwe should be thinking that you probably don't have to raise capital?







Well, the overall level of the balance sheet quarter to quarter is about unchanged. Obviously capital is down from where weclosed the third quarter given the losses that we experienced this quarter. We have historically had very strong capital ratios,significant excess capital, obviously the reduction will reduce that somewhat but our capital ratios we believe are still verystrong. We don't see a particular need to address that. Of course we do expect that the closing of the $1 billion convertiblesecurity we sold to Citic will happen during the first half of the year and that will add to the equity capital base. So with that,capital ratios should move back to levels that we had been running at.


And just to refresh us, what sort of, what sort of capital ratios do you target? What the is the benchmark that you want to worktoward?


Well there's a variety of things. Obviously we're focused on absolute levels of balance sheet leverage, we're focused on adjustedleverage levels and probably most importantly focused on our tier 1 and tier 2 capital ratios which as you know, we don'tdisclose, but obviously, we monitor that carefully and we've had significant excess position there and we'll continue to try tomaintain that.


So just, I don't want to put words in your mouth but what I think I heard you saying is that with the closing of the Citic transaction,you would expect say by mid year that your Tier 1 and tier 2 would be back to where they were say at mid year 2007. Is thatfair?


Yes, I think that's fair. Obviously all things being equal with what's happening with the balance sheet, but I think that I also wantto point out that we're comfortable with where the capital ratios are right now.


Okay, great. That's very helpful, thank you.


Okay.

Operator

The next question comes from James Mitchell from Buckingham Research. Please ask your question.

James Mitchell - Buckingham Research - Analyst

Hi, Sam.







Hi, Jim.


Just a quick question on the comp. Obviously, it did come down quite a bit this year but then you mentioned that you hadabout $720 million in additional stock that didn't flow through, I guess the expense line right now?


Right.


So that helps I guess lock in some people. I guess would it be fair to think about adding that to the comp this year to get sortof a more of a truer comp expense for the year in terms of what you doled out to your employees?


Well I think you could do that. As I think you know we've been a little bit off industry standard with the way that we've awardedstock compensation because of the terms of many of our stock award plans were such that the accounting for those were thatwe expensed them at the year of grant which is not the norm. The norm is to amortize it over the vesting period.


Sure.


The changes that we're making kind of lock in terms in terms of the service periods that are necessary to receive the award,which of course we've done in order to provide additional retention and that will have the effect of requiring those awards tobe amortized in the future, but I think it's fair to think about as the employees might look at it, from the employee standpointof the value of the compensation awards this year, by adding that back in.


Okay, and then going forward, with the 250 million in cost saves from the severance, I guess annually, did you disclose whatthe amortization period would be if it's a typical three year, I guess you would kind of cover the increased costs going forwardwith the cost saves, is that kind of how we should think about it?


Well, I would think that the way to think about the stock awards is if you assume a relatively level amount of stock awards overthe next three years, and I don't know if that's a good assumption or not but if you make that assumption, the $700 million thatwe awarded this year, our vesting period is basically three years, so a third will amortize in the next year, and whatever next






year's award would be, that wouldn't start amortizing until the following year, so I think we will likely see some head room inthe compensation numbers as a result of the period of time it takes to ramp up the deferrals and we expect the $250 millionreduction in the operating cost to start to help in the first quarter.


Okay, so and that's mostly in the comp line, so you're saying that because of the switch, we might see,assuming a normalizedkind of level of revenues that the comp ratio could be a little bit lower than in the past?


That's right.


At least initially?


Yes.


Okay, and did you, any sense on the legal expense, how much of that contribution I assume was maybe some litigation reservebuilding in there? Any indication of what size that would be?


I believe the increase in litigation and legal expenses was about $60 million.


Okay.


Versus last quarter.


Okay, great. Thanks.


Okay, Jim.






Operator

The next question comes from Michael Hecht from Banc of America. Please ask your question.

Michael Hecht - Banc of America - Analyst

Hi, Sam, good morning.


Good morning, Mike.


Can we maybe talk a little bit about with a loss of this magnitude this quarter can you just talk a little bit about I guess how it'simpacted the Board's relationship with the Executive Management team and what the Board is going to be looking for here toreally restore confidence, which I'm assuming is probably pretty shaken, and then maybe as part of that talk a little bit aboutchanges you guys have made to bolster risk management practices, now , to help insure you guys are kind of more protectedfrom a loss like this going


Well let me start with that last part first. I think that there's a lot of discussion about risk management practice and whetherthese losses were unexpected, surprising, et cetera. Obviously, they're unexpected and obviously they aren't acceptable, thelevel of losses, but these losses weren't surprises, if you will. I mean we understood the nature of our risks. We understood thenature of the mortgage positions that we held. Candidly, we made decisions that in hindsight, as it related to the hedging ofthese books that didn't turn out well. We also made decisions as it relates to the ramping of the CDO business, as the CDOwarehouse loans, if you will, that in retrospect, were very poorly timed and bad decisions.

And they caused, they were certainly looked at at the time, the decisions were made to do them, and they didn't turn out well.So, these were operating in unprecedented market conditions. The declines that we've seen as a result of the level of defaultsthat we're experiencing in the mortgage market have been very significant and it's been difficult certainly not easy to be ableto hedge these exposures but these were decisions that were made, so I think that probably plays into what the relationshipfor the executive management is with the Board which I think is very solid and very good, but it's a difficult environment andwe're trying to manage through it.


Okay, can we walk through I guess the non-comp expense? I know there's a lot of noise in there this quarter with the severanceand some of the legal stuff. I mean, can we talk about I guess how we should think about a run rate there going forward andjust to be clear, the $250 million reduction, is that pretty much all comp or is there some non-comp kind of embedded withinthat?


I would say the bulk of that number is comp, and it's direct compensation and benefit cost and some amount of ancillarycommunication, phones, market data, etc. And I think you will, with taking 1,400 employees out of the census, I think that it's






reasonable to assume that we will start to see declines in all of the infrastructure lines, occupancy, communications, et cetera.So that is is not included in the 250 number and we'll see some decline in those numbers going forward. Also included in thisquarter as I said were $100 million of severance charges which are non-recurring and we did have an uptick in legal and litigationrelated cost of about $60 million.


Okay that's helpful. Coming back to the equity business for one more time, is it possible, last quarter the structured note gainwas about $225 million if I remember, is it possible to get what that amount was, and then thinking about the results andstructured equity products it seems like a a lot of other folks that have reported so far have seen strengthen those areas, I'mtrying to understand if the weakness that you guys saw was more just a lack of customer activity or bad positioning or what?


More a question of bad positioning. Unfortunately, the trading results were extremely poor. We're not well positioned for thevolatility we encountered in those books and had weak trading results as a result, coming off a record third quarter performance.Customer volumes were not materially different, just did not have a good trading quarter.


Okay is it possible to size the structured note gain in Q4?


I think the total amount of structured note gains from the second, from the third quarter to the fourth quarter, total gains wereabout $400 million in the third quarter and about $200 million in the fourth quarter. And that's spread across equities and fixedincome both rates and credit.


Okay, so some went into equities and some went into the fixed income?


Right.


And then you mentioned the reduction in the OBO commitments I think from $7.6 billion down to $600 million.


Right.







Can you give more color on how you get there closed deals versus deals that maybe got pulled?


Well the biggest move in there was a deal that didn't happen which was our involvement with the CableVision transaction. Thatwas $4.5 billion I believe, so that deal fell out of the pipeline, the balance of the change were transactions that were closed. Youcould see that because our funded balances are down, we were able to distribute much of that.


Right, okay. And then can we go back to the I guess the fixed income business, this quarter? I mean just maybe getting a littlebit more color on how some of the sub-segments of fixed income perform because if I back out the marks, I get a run rate ofmaybe like $350 million in fixed income which I guess if we assume even some of the structured note gains went through there,maybe even a little bit softer than that, I'm just looking to get a little more color on performance across rates, MBS, credit, andhow we should think about kind of a run rate going forward for that business?


Right, yes, well it was a very weak quarter for us across-the-board of fixed income, and it's certainly not indicative of run ratelevels by any stretch. In addition to the large mortgage losses we took, which effectively swamped anything else we were doingin mortgages , the credit markets were very difficult. The stress business was good but the structured credit and flow tradingareas were very difficult with volatile market conditions and generally wider credit spreads, so results there were negative. Theywere also relatively weak in the rates business, particularly position taking in the interest rate derivatives areas and foreignexchange in the options book, a lot of volatility and we had weak trading results there. Customer flows are good, strong, buttrading results were weak across-the-board in fixed


Okay, and just last question, I just wanted to follow-up on something you said in your comments. Investment Banking revenues,you said $150 million for M & A, I think $113 million in underwriting, flat or zero in merchant banking, that adds up to like $263million versus the 205 you reported. Am I missing something?


Yes, we have a process where we allocate because of the leverage finance business and some of the other businesses done infixed income where those revenues largely reside, we do an allocation of revenues and costs back and forth between thebusinesses. Normally those are revenues in the fourth quarter, there were losses from the writedowns of loan facilities, eitherleverage finance or mortgage products, so we tried to strip those out and talking about how the business flows looked in thefourth quarter, and I think those numbers that we gave for Investment Banking underwriting revenues are a truer picture ofthe volume of activity. Equity underwriting revenues were pretty good. Fixed income obviously was soft because the high yieldwas down quite a bit.


Okay, got it. Thanks a lot, Jim. Happy Holidays.







Thank you, Mike.

Operator

The next question comes from Douglas Sipkin from Wachovia. Please ask your question.

Douglas Sipkin - Wachovia - Analyst

Yes, hi, good morning, Sam, how are you?


Good, how you doing?


Just two questions. One, I guess more from a longer term strategic standpoint. Given that I think we're probably in a period ofhigher volatility, it does sort of appear and obviously not just for you but the entire industry the ability to hedge and usederivatives to offset risk is becoming a lot more challenging. For a firm like you guys is maybe a little bit smaller than the rest,how do you think about that potential structural change about your ability to compete in certain businesses? Are there goingto be areas now where you guys make a conscious decision just to say we're not going to be able to compete as effectively asmaybe we were without that ability to hedge going forward and as a result we're going to pull back in certain areas?


No, not at all. I think there's nothing really new here. Derivatives have been a fact of life for a long time and we've had a verysuccessful derivatives franchise that has grown dramatically over the last five years. We've now crossed the Board both rates,equity and credit have all enjoyed very strong performance. We just had a very difficult operating environment this quarter.When you're running trading positions and customer facilitation books, it doesn't always go your way and we had a very toughquarter.

Not the first tough quarter we ever had. I'm sure it won't be the last one, but I don't think the results that you saw for the quarteracross those businesses are any indication of inability to compete. What's happening in the mortgage market, I also don't thinkhas any reflection on that. Candidly, this has been a very difficult market to call, a handful of firms have done it reasonably well.Most haven't. We've clearly been just by looking at the results, we've clearly been wrong in the way that we position the booksthrough the course of the year. I don't think that that is a risk management failure, if you will. I think it really is we made judgmentsthat proved to be inaccurate.


So I mean, I guess you guys still believe in the growth and the innovation of the derivatives market especially from a hedgingstandpoint is still valid and that for you guys this year was really more of a function of misinterpreting markets?







Unfortunately, I think that's the case.


Yes.


And we're not happy with the way that we performed and certainly not happy with the outcome of it, but as it relates to mortgagemarket, unfortunately that's what happened and then these other markets, when you get into difficult market environmentsand environment gets quite volatile, sometimes that works out, sometimes it doesn't. It's just a tough quarter.


Okay, I will also, shifting gears, I was encouraged to see the margin balances staying front. I know you guys had maybe a littlebit more challenges in the first half of the year. Could you maybe walk us through what you guys are doing to sort of continueto impress upon potential hedge fund clients the strength and long term franchise of your business in the prime brokeragearena going into 2008?


Sure. Well, I think domestically, the franchise is certainly well known and its capabilities are evident. The difficulties that we hadhad in the third quarter had nothing to do with the franchise itself. It had mostly to do with concerns in the Markets about thecredit, the viability of the balance sheet given the significant dislocation we saw in August and the lack of visibility really inanybody's balance sheet at that time, so I think as we worked our way through that and the markets is have calmed down andthere's been greater visibility into what the nature of the risks are that people are running, that issue has subsided, so I thinkthat domestically, it was really all about somewhat of a panic that was going on in the Summer as this market dislocation wasunfolding.

I think as we go forward, the goal is what it always is which is if you provide strong customer service and you are committed tothe business and you deliver the full capabilities of the firm of your clients you'll win more than your share of the business andI think we'll do that. Internationally, we're very focused on building out the prime brokerage business in Europe. We've hired avery strong team of guys that we're very pleased with and we think we're off to a good start and we're very optimistic aboutthe growth that non-U.S. based business. So that's really, nothing has really changed here other than having to deal with theoperating environment that we were confronted with.


Okay, and then just finally impossible question, but I'll give it a shot anyway and I don't even expect, to have a pinpoint answerbut putting this year aside thinking about 2008 and the way businesses are operating, obviously the mortgages at a much lowerlevel and maybe less in the way of non-conforming mortgages. I mean, what type of returns do you think are reasonable foryou guys? Obviously not in the November environment but maybe something that's a little bit better than November but stillchallenging sort of thinking about potential book value growth for 2008 and obviously i know i'm not going to hold you to thisgiven how dicey the markets are but i'm just curious what you think you can do in sort of a new normal operating environmentwhich who knows what normal is but certainly something that did not exist in 2005 and 2006?







Right, well I'm not going to try to guesstimate at what kind of operating returns we're going to have but I think that we don'tbelieve that the level of revenues we saw this year is anywhere near indicative of the revenue generating capacity of the franchise,so we would expect revenue levels to be considerably higher, obviously. Not maybe at 2006 levels because we would expectthe fixed income businesses to be a bit more challenging, but as we look at the business mix is always changing and whilemortgages may be somewhat smaller this year relative to where we were in '06, it's difficult to predict because I think if marketsfirm, the opportunity in the distressed side of the business may be very strong.

Secondary trading activity certainly going to be the primary area of activity in 2008 or at least it would look like that at thismoment in the mortgage business, spreads are very widened, we think it's kind of an interesting opportunity for people withfranchises like ours, but when you look at the broad mix of the business, we expect our energy business to make a big contributionthis year, we're very encouraged by that. We think the equities and global equity and prime brokerage platforms continue tobe poised for significant continued growth, so I think that revenues will be probably lower than '06 and what that turns intoprofitability will be a function of the mix of the business and our ability to control expenses.


Okay, and then just finally, obviously, challenging 2007 but you guys obviously over the long term have done a phenomenaljob. Any update on succession planning over the next year, two years, etc? I thought I'd seen some headlines not from you guys,just from Newswire, so any update you can provide on that process that may be going on or will be going on some time in2008?


No, I don't have any update to give you on that, Doug.


Great. Thanks for taking my question, Sam.


Sure, thanks.

Operator

The next question come from Meredith Whitney from CIBC World Markets. Please ask your question.


Hi, Meredith, are you there?

Meredith Whitney - CIBC World Markets - Analyst

My question has been answered, thank you.







Okay.

Operator

The next question comes from Mike Mayo from Deutsche Bank. Please ask your question.

Mike Mayo - Deutsche Bank - Analyst

Yeah, you had $3.2 billion of gross writedowns on the inventory. How much was the inventory?


I think we told you the inventory balances were $46 billion at the end of the quarter.


So in total, how much have those inventories been written down? I mean, probably more writedowns than just this quarter,that's why I ask.


Yes, I don't know, Mike, off the top of my head. I think we disclosed over the third and fourth quarters, we had taken totalwritedowns of $2.6 billion. The bulk was in the mortgage area, and as you may recall I think we disclosed approximately $200million in net writedowns and leverage finance in the third quarter, so that gives you a sense of what the total size of thewritedowns have been from the significant decline in value we've seen in the mortgage space.


How much were the writedowns this quarter on CMBS, and what's the assets there?


The bulk of the writedowns that we took during the quarter, while we broke out $1 billion of the $1.9 billion, of the balance themajority is from the residential mortgage portfolio. CMBS inventories are currently at about $15 billion out of that $3 billionthat we reported as current mortgage inventory balances. When we look at the $15 billion, I will point out that of that, thelargest majority are relatively short-term floating rate commercial loans.


And you said you had writedowns of warehouse facilities this quarter. How much do you have left on those facilities and howmuch have those been written down?







Those are gone. We are out of those facilities. The inventory has been liquidated.


You also said you, going back to the writedowns and the residential mortgages, so how much have the mortgages been writtendown maybe by subsector? So Alt A, how much has that been written down and prime mortgages, how much have those beenwritten down?


Well, I'm not going to get into the detail of all of the writedowns, Mike, but I think it's fair to say that when you look at the lossesin the mortgage space, most of the losses are going to be in the lower credit quality loans, so Alt A is going to bear more of itthan the prime loans are going to.


Okay, and then one more general question. How is the Management transition going with several changes there, and the reasonI say that, clearly it's tough markets but when you compare Bear's performance to a few of the peers , you mentioned weakerequity trading, fixed income when you strip out the charges was a little bit worse than peer, some of the prime brokeragerevenues were down a bit this quarter, so it, just based on the data itself, it looks like some of the problems for mortgage couldbe spilling over elsewhere at the firm. I guess do you agree or disagree with that and


Well, I disagree with that, Mike. I think that I can understand your observation but I think the simple facts are we dealt with avery challenging market environment across-the-board and we had very weak trading results unfortunately across a numberof the different businesses, in addition to the mortgage writedowns, and given that, the size of our other fee based businesses, it's just not big enough to offset that. That's just obvious, so it was a difficult quarter on the trading side from looking at at leastsome of the results I've seen from others I don't think our performance in equity derivatives or structured equity products wasreally that far off the norm. Credit trading was very tough for everybody in the business, so I think our results are, you know,more or less in line with what you're seeing from others, albeit smaller asset management and private client businesses if you


All right, thank you.


Okay.

Operator

The next question comes from Jeff Harte from Sandler O'Neill. Please ask your question.






Jeff Harte - Sandler O'Neill - Analyst

Good morning, Sam.


Hi, Jeff.


A couple of things. One assets under Management you talked about the spinoff impacting them. Beyond the spinoff, can youtalk a little bit about what kind of flows you seen or how things have been going as far as asset levels go in the wake of thetroubles you guys had last quarter?


Yeah. That's a good question. I think that things have actually gone quite well. Obviously a very challenging third quarter hascreated a big challenge to the franchise. We spent really the last three to four months trying to stabilize the situation changesin the Management team, stabilizing the internal situation employee morale etc. Which I think is largely been done and stabilizingthe situation with clients. We've seen very little spill over impact from the problems we had in the high grade funds into otherareas of Asset Management. We did see net positive in flows during the quarter, so we're encouraged. The alternatives businesshad a good year, a number of the established funds that we had there have performed well. It's been challenging because really,anything, any fund that was focused in the credit markets has had very difficult, a very difficult time of it, but the equities andemerging market funds have done well, and again, on the traditional side, we're continuing to plug away at building thetraditional side of the business. I think we're in good hands there with the Management changes we've made.


Okay, and in the wake of a rating agency finally taking action against a bond insurer yesterday --


Yes.


-- can you talk a little bit about A,your exposure or your dependence upon bond insurers to get to net numbers versus grossnumbers and secondarily, given your merchant banking investment in ACA, do you still own a portion of that? Can you give usany details on that?


Yes. Start with ACA. It often gets confused because our merchant banking fund is an equity owner of ACA and we are oftencreating some confusion as to what our level of involvement is away from that. The equity investment, the exposure to theCompany from our equity investment through the fund is not material, and as it relates to counterparty credit exposures toACA, those exposures are also quite benign and fully reserved and reflected in the earnings and we have no additional exposureto them, so I think that that is quite well contained and behind us, whatever the exposure was. As it relates to other monolines,






we have very little wrapped CDO credit exposure, almost none, and whatever exposure we have for them is typically limited toour credit trading books and to some extent, municipal inventories.


Is wrap tight protection maybe something historically you've been more dependent on and seeing the way things were goingyou reduced your exposure to it or has it typically been something you don't have a lot of dependence an?


It's typically something we don't have a lot of dependence on.


Okay, thank you.

Operator

The final question comes from Glenn Schorr from UBS. Please ask your question.

Glenn Schorr - UBS - Analyst

Good afternoon.


Hi, Glenn. You there?


Yes, I'm here, can you hear me?


Yes.


Okay, thanks. Just a quick one on clarification, on the 700 or so in stock based comp, comp down on the P & L is down 21% forthe year, if you add it back you get it down around 4 or 5. Is that, am I doing apples-to-apples or mixing things?


It's a reasonable way to cuff it, to try to take a look at the numbers. Obviously, aggregate compensation levels have to reflectthe operating environment that we're going through in all of the areas of the firm, not just in the mortgage area, so when you






look at the results for the full year, we have many areas of the firm that had record years and we had to obviously compensatethe people that did the work. A few areas that had very difficult operating environments and we had to deal with that so a lotof it, compensation often becomes an issue of mix. The key focus obviously is making sure that we're paying market competitivecompensation and retaining the people, which we think we've done and that's the key objective in all of this.


Okay, don't get me wrong I'm a big fan of comping the people.


I'm sure you are.


You mentioned balance sheet reduction as one of the things going forward in terms of how you feel about capital adequacy.What exactly is done during the quarter and maybe you can size it in terms of net asset reduction, like what makes its way offand is that more of a permanent way of thinking about Bear in terms of a more, a little bit more derisked franchise from a balancesheet perspective going forward like what kind of net leverage reduction are we looking at?


Well I think you're actually going to see net leverage probably uptick a little bit, but that's mostly a mix issue, so when we lookat or gross leverage, when you look at total balance sheet footings we'll probably be largely unchanged versus the Augustquarter but when you look, when we look inside the mix of that balance sheet, clearly mortgage inventories are declining largelybecause there's very little intake on the origination side, very low levels of warehousing for either CDO's or CLO activities virtuallydoing nothing in CDO's obviously, so the balance sheet demands of that business are likely to diminish a bit in the near term.Offsetting that is the mix in the liquid products could be up at any given period, whether those are agencies or treasuries,whatever that may be, either as part of your dealer inventories or hedging of your derivatives books and of course growth inthe customer margin balances which are a good thing and we're obviously strongly trying to encourage that, so I think that,we think about capital adequacy, we monitor most intently our capital ratios, which I said have been very strong, and we thinkare quite high relative to peer comparisons to the extent that you're capable of doing that and while they've dipped a little bitas a result of a loss that we've taken, we do know that we should have the closing on the convertible with Citic during the firsthalf of the year, and our expectation is that inventory balances will continue to grind down, in an environment where we're notoriginating a lot of new mortgage product.


I appreciate that, just so we're clear, I mean, it seems abundantly clear that you don't expect any further capital raises from here,it's interesting because you're seeing big capital raises out of some of the larger peers but what you're saying then is it's afunction of mix and on balance sheet and overall size as well because arguably your charge off is just as big as anybody else'son a percentage basis.


I think I didn't run those numbers but I think each Company has its own issues that it's dealing with, and you know, it's hard toknow what the capital ratio situation looks like inside of each firm, but I think those decisions typically are predicated upon that.







Okay, thanks very much, Sam.


Okay, Glenn.

Operator

At this time, I will turn the call over to Mr. Molinaro for any closing comments.


Well if there's no further questions, thank you, everybody for being with us. Have a very happy holidays and we'll see you nextquarter. Thanks.

Operator

This concludes today's call. You may now disconnect.

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